Identify each of the following events as: a) part of an expansionary fiscal poli
ID: 1220579 • Letter: I
Question
Identify each of the following events as: a) part of an expansionary fiscal policy b) part of a contractionary fiscal policy c) part of an expansionary monetary policy d) part of a contractionary monetary policy i. The corporate income tax rate is increased. ii. Defense spending is increased. iii. Families are allowed to deduct all daycare expenses from their federal income taxes. iv. The individual income tax rate is decreased. v. The Federal Reserve Bank buys Treasury securities. 4. Assume the Federal government runs a budget deficit in the current fiscal year. i. How can the Federal government fund the deficit? ii. If the Federal government decides to issue U.S. Treasury securities to fund the deficit, what happens to the level of national debt, all else held constant? iii. Assuming the Federal government and firms compete for the same savers’ dollars in the loanable funds market, what is likely to happen to interest rates? iv. Given your answer in (iii) above, is crowding out more or less likely to occur if the deficit is funded by Treasury securities? Explain.
Explanation / Answer
i. The corporate income tax rate is increased.B
An increase in taxation is a part of contractionary fiscal policy since it decreases the aggregate demand.
ii. Defense spending is increased.A
An increase in defence spending increases the aggregate demand and hence is an expansionary fiscal policy.
iii. Families are allowed to deduct all daycare expenses from their federal income taxes.A
An increase in consumption spending increases the aggregate demand and hence is an expansionary fiscal policy.
iv.The individual income tax rate is decreased.A
A decrease in tax rate increases aggregate demand and is a part of expansionary monetary policy.
v. The Federal Reserve Bank buys Treasury securities.C
Since the Fed buys securities money supply would increase in the economy.Thus, this is part of an expansionary monetary policy .